Your academic expertise is in accounting and you are also a CPA.  Why did you become committed to ESG investment?

I specialized in non-financial disclosures in accounting.  Today, when we talk about non-financial disclosure, we are mainly discussing ESG investment behavior and the social system of information disclosure.  This may be a new investment or economic principle, but it is not yet established as an academic discipline.  I believe it is my job to communicate and help normalize this new way of thinking.

The main academic thrust of accounting in recent years has been to demonstrate whether changes in accounting disclosure reflect changes in corporate value or in stock prices.  If we insist that the primary purpose of a company is to maximize corporate value, then we renounce any corporate responsibility to address climate change and other environmental problems.  If we reject that belief, however, we reject capitalism.  We need a way of thinking about capitalism and the economy that doesn’t prioritize corporate value.  That doesn’t mean eschewing any increase in corporate value, but there would have to be some preconditions for seeking an increase in corporate value and stock price, namely the stability of society and the environment.  Protecting those preconditions should be more important than individual profits.

Can we simply assume that if companies take ESG into account they will increase their corporate value, meaning their return on ESG investments will also increase?

It is certainly easier to explain it that way.  For example, it is easy to demonstrate this by selecting a group of stocks that take ESG into consideration and a group of stocks that do not and comparing the changes in their stock prices.  However, the essence of ESG is that corporate value, which can be (partly) expressed in terms of stock price, is not the primary objective.  “Universal ownership” expresses that idea.

Yes.  The concept of universal ownership originated in the US but spread with the UN’s advocacy of PRI in 2006, and I introduced it to Japan at an early stage.  It is a difficult concept, but it’s similar to the idea of sportsmanship.  In sports, you can't just do anything to win so long as you’re within the rules.  If so, you could only influence players’ behavior by imposing stricter rules, which might ruin the sport.  What makes a sport a sport is the unwritten code of sportsmanship, which is separate from the rules enforced by referees.  Universal ownership is a similar concept.

Universal ownership operates on the basic premise that investment decisions are driven by a desire to protect society and the environment.  Rather than imposing strict rules, universal ownership assumes we will be guided by conscience.  Financial markets have mulled this concept for some time, but meanwhile changes in conventional thought about investing have been outpaced by climate change and widening economic inequality.  It has become necessary to incorporate these ideas into investment decision making.

The FSA's Expert Panel on Sustainable Finance, which you chair, is one example of the change in thinking about investment.  The June report has become a hot topic in the asset management industry.

The impetus for the panel was Prime Minister Suga's announcement in October 2020 that Japan would be a carbon-neutral, decarbonized society by 2050.  Reaching that goal would require spending several hundred trillions of yen over the next 10 years, which is why I think the idea is to mobilize finance.

I myself believe that it is no use discussing only the immediate technical issues.  Sustainable finance is also about changing the way the economy works.  For example, if we change the industrial structure as well as our energy framework, some people will lose their jobs in the process.  We cannot become a decarbonized society without considering the livelihoods of these people.  The basis of the economic system is finance, and mechanisms that take into account society and the environment must be incorporated into that system.  That is why I said at the beginning of the panel that we need to take the perspective of changing the way finance works over the next 10 to 20 years.

What are some of the notable points in the report?

There is a description in the report: “The environmental and social effects of sustainable finance are called ‘impact’ and being used as a measure of economic activities.”  I use the term "risk-return-impact", which means that for the same return, a smaller risk is better, and for the same return, a larger impact is better.  However, using impact as an indicator for financial behavior has not yet been theoretically established.  Nevertheless, I think it is a significant step forward that the report clearly states that it is used as a measure of economic activity and has been authorized.

Some have pointed out that the report does not state specifically who will do what.

This is the first report that the FSA has issued on sustainable finance, so it is naturally more of an overview and lacking in some detail.  The report concludes by stating the FSA will continue to promote ongoing discussions.  I would like everyone to see this as a starting point.

Also, it was not practical to go as far as the EU in developing a taxonomy (a standard for classifying sustainable economic activities).  The EU’s Sustainable Finance Disclosure Regulation (SFDR) went into effect in March of this year, and it will include criteria allowing mutual funds to label themselves “sustainable”.  There was some controversy over whether Japan should establish similar criteria, but I believe it is important for financial institutions to declare and disclose their basic policies on ESG, and that a system like the SFDR will indeed be necessary.  To do so, standards – i.e., a taxonomy – are necessary, so I think the two should be considered as a piece.

Thank you very much.